J.C. Penney’s A (Strong) Sell, Says Maxim Group

By Sam Mamudi

Apologies for being a little late, but this morning Maxim Group initiated coverage of retailer J.C. Penney (JCP) with a Sell rating, with analyst Rick Snyder airing very strong concerns about the company’s cash situation:

Cash flow is weak and could become critical. At current burn rates—and absent any further asset sales—we estimate that J. C. Penney will be virtually out of cash by fiscal year-end 2013. However, the company does have “a few hundred million” in remaining assets that could be monetized, as well as a $1.5 billion asset-backed revolver. Asset sales should add liquidity while the revolver should provide a lifeline if trends don’t improve, which would extend our timeline.

So maybe CEO Ron Johnson should reverse course and go back to the old sales-and-discounts strategy that used to be Penney’s bread and butter? It’s not quite that easy, writes Snyder:

A reversion to the previous strategy of discounting could present its own challenges. We believe that a reversion to the previous strategy of discounting, while initially viewed as positive by investors, would present its own challenges. These potential challenges include a more labor-intensive business model, lower gross margin potential, and a weak balance sheet. Further, these changes would not guarantee that sales would reemerge as customer reacquisition may prove difficult. While we believe such a revision to the company’s current strategy would initially be viewed as positive, any such sentiment may be tempered by the realization that customers may be
slow to return.

Damned if you do, damned if you don’t, it seems. Snyder set a $10 price target for Penney’s stock, which fell 2.2% today to close at $19.38. Penney’s stock is down 1.7% in 2013, and has lost 53% in the past year.

Johnson appeared on CNBC today to defend his management, and rebut many of the brickbats against him and Penney.

In a response to a question about whether Penney is running out of cash, Johnson said:

No, no. There is a lot of rumors; we have like a rumor a day it seems like. Today there is a rumor about layoffs at headquarters — I would never talk about that. But you got to separate the fact from the rumor, and ultimately we need to have the right cost structure for the business and we’ve got to grow, and we’re going to ensure we do those two things.

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There are 7 comments

FEBRUARY 6, 2013 5:58 P.M.

jack wrote:

Assets that could be monetized is far more than "analyst" suggests. Just look at Sears selling $300M for 11 anchor sites to GGP as an example of a possiblility.

FEBRUARY 6, 2013 6:33 P.M.

JW wrote:

The only solution to JCP's problem is to fire the CEO.

FEBRUARY 6, 2013 6:49 P.M.

Karmike wrote:

I agree with JW! JCP could free up $53 million by getting rid of Ron Johnson.

FEBRUARY 6, 2013 9:40 P.M.

RON wrote:

RON JOHNSON has no business being "CEO of JCPENNEYS". LOOK hard into his past, TARGET almost went under do to his way of " MANAGEMENT". TO" DRAW CUSTOMERS BACK" ADVERTISE" that "RON JOHNSON IS GONE FROM THE COMPANY". Than restructure PENNEYS back to the 'OLD PENNEYS".

FEBRUARY 7, 2013 8:12 A.M.

Timothy Towner wrote:

We all knew the day Ron sold half his shares this company was in huge trouble , to pay taxes ????. Thank god we sold fast.

FEBRUARY 8, 2013 12:25 P.M.

Hawkeye wrote:

This shoud be a .50 cent stock.

FEBRUARY 8, 2013 12:27 P.M.

Hawkeye wrote:

...Going back to discounts and sales? Kohls and walmart will wipe em out...

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